Before I start explaining this system I want to say thank you to everyone here. I am constantly amazed by the cooperation and teamwork that I see in nearly every thread here. It is just awesome to see so many people sharing their thoughts and experiences (both good and bad) in an attempt to better their own and each others trading experiences.
Now to the system......
I have been reading many of the systems on this board and have even tried a couple of them on my live mini account for fun. None of them has really seemed to fit my trading style. But they each seem to have a piece or two that I really like.
I found this system while reading How Technical Analysis Works by Bruce M. Kamich. In his book he calls it "The 3-Moving-Averages System". It is a simple system, which I really need with a fulltime job in IT and a two year old son.
While I am not the first to come up with this idea, I did decide that it could use a better name, so I am calling it "The Fibonacci Rainbow".
The basics of the system go like this...
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Place three moving averages on the 1 Hour chart of your choice.
I am not a huge expert in moving averages but the Exponential Moving Average (EMA) seems to give the truest indication of the price action on the underlying instrument. So for now I am using EMA's.
While the combinations of numbers you could use for the EMA's are limitless he does mention using one of these three groups of numbers.
- Cycle Lengths
- Harmonic Numbers
- Fibonacci Numbers
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I personally like the Fibonacci numbers so I am going with those.
- EMA #1 uses the Fibonacci number 8 and is colored yellow
- EMA #2 uses the Fibonacci number 13 and is colored orange
- EMA #3 uses the Fibonacci number 21 and is colored red
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When you lay these out on a chart they will look like a rainbow thus the name
“The Fibonacci Rainbow”
Entry Signal:<o></o>
The entry signal for “The Fibonacci Rainbow” is very simple.
Go long – When EMA#1 > EMA#2 > EMA#3
http://kivasolutions.com/images/fibo...0go%20long.gif
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Go short – When EMA#1 < EMA#2 < EMA#3
http://kivasolutions.com/images/fibo...go%20short.gif
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Exit Signal:<o></o>
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The exit signal is also very easy using this method. Instead of waiting for the longer cross back, you exit your trade when EMA#1 crosses back over EMA#2. This will get you out of a reversal trend a bit earlier than waiting for the cross to the slowest EMA.
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Sample exit signal
http://kivasolutions.com/images/fibo...it%20point.gif
Reentry Signal:<o></o>
With this method there will be times during a major move in one direction that the exit signal will be triggered but a reversal signal has not yet been given. Watch for EMA#1 to cross back over again and continue with the trend. As soon as EMA#1 double crosses back out you can resume your trade. If you stay out of the trade it is quite possible that you could miss quite a few pips.
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Closing:<o></o>
Looking over the past few months of charts using these rules I have seen several large moves that would have netted 100+ pips at a time with minimal whipsaws. I am fairly inexperienced with other types of indicators so maybe one of you guys has a suggestion of one that could help cutout the few whipsaws.
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Any extra ideas would be appreciated, as I need to start saving for my son’s college…
Thank you,
Tim (a.k.a. altapowder)